Mental Model: Situational Knowledge

Last night, I was talking with Aaron about the situational knowledge mental model and its implication for business innovation. For those of you who aren’t familiar with it, situational knowledge is a type of experience-based knowledge that arises either organically or through training, creating a database of relevant facts and implicit understandings about situations, people, or processes that you may not even be aware exists but that stands ready to be called upon at a moment’s notice. It is an evolutionary adaptation that allows us to increase chances of survival by behaving in efficient, optimal, or safer ways, integrating feedback from experience into our decisions. Situational knowledge can create certain efficiencies that make it more valuable than raw intelligence or manpower.

One of the more famous illustrations of the situational knowledge mental model is the “which direction is the bus going?” test. When the following image is shown to adults, a large percentage of the population thinks there isn’t enough information to make a determination. They will randomly guess or attempt to work out the answer by asking questions.

Show the same image to a group of kindergartners who are still learning to tie their shoes and almost all of them get it right instantly, often without appear to do much thinking. The answer: From the perspective of the person looking at the drawing, the bus is going left. You know because there is no door visible. The kindergartners see a bus and subconsciously think about getting on it. That is their day-to-day experience. They don’t see a way to get into the vehicle in the picture, so they know the door must be on the other side. If you can’t see the school bus door, the bus is facing left from your perspective. Even at 5 or 6 years old, the brain does these calculations in the background without a lot of conscious effort. It’s remarkable, really.

The answer: There is a disparity in situational knowledge. The people designing microwaves and the people using microwaves in the United States are largely not the same folks.

For a person to get to the point they are in charge of designing, launching, and selling a microwave oven, they have to have a certain skill set that is going to put them toward the top of the household income distribution. You’re often talking about those with advanced engineering degrees, an MBA, or other skill sets that allow them to earn individual incomes far higher than a typical member of society. For example, median household income in the United States is around $52,000, and that consists of two adults working. Yet, a single engineer in the GE appliance division is paid roughly $73,000 per annum. Once you get to take over a team, your individual salary will range around $90,000 to $100,000. Even the interns are paid around $20 per hour.

Now, consider that probability and sociology data tells us that a person in this position is much more likely than the general population to 1.) be married, 2.) stay married, 3.) be with someone who also has a college degree and earns a lot of money. We’ve gone into the effects of assortative mating on income inequality that arose now that women are fully participating in the workforce so there’s no need to go into the numbers again. Suffice it to say, it is almost a sure thing that a majority of the people determining how the machine functions are part of a household unit that generates six-figures in cash every twelve months.

That’s relevant. Most families in that demographic have a certain standard of living. Let’s pick a major metropolitan area – we’ll go with Houston – and look at how the lives of those making the decisions might differ from the lives of those using the product.

The higher income, college-educated family might live in a house only slightly above average in terms of cost and size. Pulling up the real estate listings, here are two active properties I found with a few seconds of searching:

This is a fairly typical house in Houston that would be affordable for a college educated family in an economically successful field. The overall price tag depending on the neighborhood would be $300,000 to $400,000. This exact home is $325,000 and 4,651 square feet of living space.

The kitchen is its own self-contained room with food preparation area on one side …

… and a window designed for sitting-area table, fireplace, and desk on the other.

Meanwhile, across town, a working class family might live in an $80,000 house like this:

A working class house in a working class neighborhood …

… with a very different setup on the inside. The kitchen is actually in close proximity to the living room and hallway, with the bedrooms being within shouting distance so sound would travel.

There is a situational knowledge disparity happening because someone in the larger home, in the nicer neighborhood, probably never heard their family complain about the volume of the microwave buttons. It doesn’t cross their mind. It’s not relevant. Yet, it is an annoyance in the smaller, less affluent home. If you’re trying to sleep and you hear a ruckus coming from the kitchen, you’re going to be unhappy.

There is a situational knowledge disparity happening because the higher income families aren’t buying the same microwaves as the lower income families. On the comparably rare occasion they do use a microwave, your typical affluent home might have a model from a specialty company such as Wolf, Miele, KitchenAid, Jenn-Air, General Electric, or Bosch that costs $400 to $1,500, has a variety of programmable options including sound mute, and blends into the cabinetry or is mounted over an oven range. It will be engineered to perfection and, short of an electrical problem in the house, should last decades. Some of them are straight out of Star Trek, with fully functioning on-board computers and auto sensors to determine the optimal fluctuation in power levels to cook the food just right as well as the ability to steam food much like a traditional couscoussier over fire could.

In contrast, a working class home is more likely to have a microwave from Wal-Mart that was manufactured under a brand name like Magic Chef, West Bend, Hamilton Beach, Sunbeam, Emerson, or Oster. These range in price from $49 to $189, are made of much cheaper components (some of which will probably eventually fail due to planned or effective obsolescence) and are missing a lot of capabilities due to building the model to a specific price point rather than to a specific function level. They almost always sit on top of something as they aren’t built into the kitchen itself.

Finally, there is a situational knowledge disparity happening because some models targeted to the lower classes do include a mute functionality, but the general intelligence level of the people designing the microwaves is higher than the population as a whole so they didn’t build an easy silence button on the front that intuitive tells you, “Press Me and I’ll Stop Making Noise”. Instead, given how comfortable they are with machinery, the engineers and executives built keyboard shortcuts that allow the person to input commands by pushing certain combinations of buttons, all of which is spelled out in the manual (that a lot of people won’t bother reading). This lowered costs and, in their mind, was still very simple because they are the type of people to read the instructions.

To get around the situational knowledge barrier, it’s important for businesses to use a variety of tools. Consumer surveys, in-home observations, and focus groups are among the more commonly used defenses. On a personal level, you can avoid a lot of it by training yourself to always check your assumptions, including asking yourself if you are experiencing the world differently from your target client or customer. You have to find a way to escape the bubble that surrounds you. I don’t think it is an accident some of the most successful business leaders in history lived like common folks for much of their lives. Sam Walton knew how to sell to the masses because he was born from, and lived among, the masses. So did Dave Thomas. So did Mary Kay. So did Rose Blumkin. There is a strategic advantage in counting yourself among the customer group that you are trying to capture as you know their needs and wants because they are your needs and wants, too.

It’s important because failure to recognize the reality of the consumer has resulted in a lot of otherwise good businesses ultimately missing huge opportunities or, worse, sliding into economic oblivion. You have to try and put yourself in the place of the person who will be making the purchasing decision for whatever it is you are trying to sell them. You need to appeal to their wants and needs; adapt your product or service to their preferred process, even if it seems unthinkable to you. Exceptions exist – as Steve Jobs famously said, Apple wouldn’t be Apple if he waited for the consumer to tell him what they wanted because they don’t know – but those are just that: Exceptions.

The adults and kids are both wrong. The bus is going nowhere, as the wheels clearly aren’t attached to the body! Actually, the example amused me, as I just watched a TV programme which had a little anecdote about Burma. They used to drive on the left, so the vehicles were right hand drive. Bus doors would therefore be on the left hand side. In his infinite wisdom, General Ne Win decided that political opinion was drifting too far to the left, and so people should drive on the right to discourage this. As a result, they are now driving right hand drive vehicles on the right hand side of the road, meaning passengers get on and off the buses into the middle of the road. Thing is, it changed in the 70’s so they’ve had plenty of time to change the buses, you would have thought… Anyhow, perhaps someone should go try this test on some Burmese kids and see what they say!

I think that’s one of the best responses to the problem and an intelligent way to behave. A real world example: The fact that Yahoo’s employees were overwhelmingly using Gmail tells you something. If they had to use Yahoo mail, it would result in a better product because they’d fix whatever it was that was annoying them (and likely the masses).

The same is true for money management. Personally, I wouldn’t trust anyone who wasn’t willing to put his or her net worth in whatever financial product they were selling or managing. I’ve never understood people buying into a fund where the guy running it is being paid $400,000 a year and has almost none of his own money at risk.

DividendGrowth

That is an interesting article. I am wondering, to what extent to you utilize the unfiltiered opinions of anonymous people on the internet in order to make your conclusions?

Aren’t you afraid that many of these people on the Redditt are mere internet trolls, whose goal is not to provide anything of substance, but to confuse and annoy others for their own entertainment purposes? Therefore, the sum of information data from their input would not be relevant for decision making purposes for your model, due to “garbage in, garbage out”?

I am wondering, to what extent to you utilize the unfiltiered opinions of anonymous people on the internet in order to make your conclusions?

Never. I prefer facts (though sometimes the facts aren’t there and you have to go on gut feeling; e.g., a really good buyer for a department store isn’t going to need to see market research to know if a product will sell to his or her customers). It’s simply one place to begin looking for ideas or opportunities that can help form an initial hypothesis that then must be supported or discarded based upon subsequently discovered facts. If you see interesting bits of discourse popping up in places and on topics that you’re normally blind to seeing for a variety of reasons, it warrants a closer examination.

A good example is Choice Hotels International, the parent company of brands like EconoLodge and Comfort Inn & Suites. The CEO was on an episode of the television show Undercover Boss, where the top management is given a fake name and goes to work through various lower levels of the business they run. He checked in as a guest at one of the Suburban brand hotels because he noticed complaints coming from it. He didn’t take them on faith, but they were a catalyst. You can watch his disbelief here as he discovers the hotel had removed all of the coffee from the rooms, put it down at the front desk, and was charging customers to buy packs of coffee individually (which they had to walk down and get – something nobody wants to do in the morning). Later, in the executive meeting when he asks about it, you can see how shocked he is to realize this was a management-level decision that his folks knew about and supported. Those complaints could have been unfounded, but in this case, a little investigation proved they were not only justified but needed to be addressed quickly.

I think the best systems, be it in non-profits, corporations, universities, or any other type of community, are those where there is some sort of feedback and address system where this sort of thing gets caught naturally. In retail, secret shoppers fill the role in some capacity as they are feeding management a stream of experiences. Online reputation management divisions are now common place among large corporations – e.g., if you were the regional manager for a major retailer and noticed a lot of people online talking about one particular employee, either good or bad, in a specific store, you’re not going to act without evidence but you are going to look into it.

It’s a bit like Sherlock Holmes. You’re constantly searching for clues. The original impetus might be from some non-statistically meaningful or verifiable source but you won’t build your entire case on it.

innerscorecard

Ironically, our microwave exploded yesterday, almost injuring my wife and I. Literally everything in our small apartment has failed once, and many things have failed multiple times. Luckily, our landlord agreed to replace the microwave. With our previous landlord, we had to argue for hours to replace even a shower head.

It is a great reminder to be even more frugal so that we do not have to live like this.

By the way, I think this model also explains why the higher education system is not also out of control cost-wise, but also not delivering the appropriate knowledge. Professors and higher education administrators do not know what the lives of students are like. Even if their own kids go to that college, they have the connections going into college needed to find jobs even when not learning something marketable.

I remember reading once about how professors and students generally view education differently, which leads to some of the conflicts in higher education; professors tend to be in the “liberal arts” tradition, where education is seen as a way to better your soul, and not necessarily your paycheck. Higher education used to be exclusively consumed by the independently wealthy, so making money wasn’t a big concern.

On the other hand, many students today view college as merely the cost of entry to a good career, and therefore want it to be as direct and cost-effective as possible. So we end up with conflict over what, exactly, college should be.

Jeff

That sounds like an interesting read. Do you think you could provide a link?

Sure. I don’t remember where I first read about it, but the most informative page I could find was (as usual) Wikipedia: http://en.wikipedia.org/wiki/Liberal_education (especially the section titled “Relationship with professional education”).

I found this quote interesting: “Thirty percent of college graduates in the United States are likely to eventually work in jobs that do not exist yet. Proponents of a liberal education therefore argue that a postsecondary education must prepare students for an increasingly complex labor market.”.

innerscorecard

I was brainwashed to believe in the liberal arts tradition. I went to a very good school…but I paid very good money for which the opportunity cost was huge. What schools do not teach is that a liberal arts education is a good thing, but it must be supplemented by self-study of things that are more useful on which you can earn a living. Like what Joshua did with business ownership and investing, or what many others do with software engineer and web development.

A liberal arts education is not bad, but it is neither necessary and sufficient for success. And if you look at how much tuition costs, it is clear that the system is predatory towards young people who are pretty much financially illiterate and innumerate in general.

Yeah. I graduated high school a couple years ago, and the college recruiters were very aggressive about getting us to take on massive student loan debts, telling us that we would basically die homeless and unloved without a degree from their specific college.

As you said I was pretty much financially illiterate back then, so I just went along with it all. I was about 99% of the way in when I started projecting how long it would take me to pay back the loans, and how much interest I would end up paying – then I flipped out and backed out of the whole thing. I even lost my new student fee, but it was worth it.

I know I want to found my own business, so I’m getting a degree in entrepreneurship from my local community college. It’s pretty no-frills, but the whole thing will cost less than 1 year of tuition at the other college, and be paid for in cash.

Jay Bugg

One of the job titles you elude to in this article is the wonderful world of product management. I say it is wonderful but I as a product manager am biased.

Having business skills, creative skills and often technical skills are the low
level prereqs to get into the field but the secret sauce to being a good PM is
empathy. There are many ways to achieve a facsimile of empathy, focus groups,
and the “eat your own dog food” mentalities are just a couple. Sometimes just
taking time to listen to customers, current and potential can be a gold mine of
information.

The often overlooked method is the creation of personas. This can be fun but is often time
consuming. Using full-blown personas in the design process allows you to become an unemployed single mom with two kids, or a middle aged senior manager at a software company all in the same meeting.

Yes, it is. This listing was for 15123 Terrace Oaks Dr Houston, TX 77068 (it shows it’s still for sale). The whole neighborhood looks very nice on Google Maps. I’m the sort, though, that would likely set up an office in the suburbs to avoid the traffic congestion of having to go into the city every day.

It wouldn’t necessarily make sense if you had to work downtown, in which case the same amount of money will get you a lot more value if you go with a condo of some sort because of the economics of scale inherent in the building with a limited footprint.

That listing you sent is interesting because the house itself has a replacement cost of, I’m guessing at most, $30,000, which means absent special circumstances (e.g., some sort of grandfathered legal right like any structure built the parcel being exempt from property taxes that could someday be transferred to a high rise development saving a ton of money for the owner or a natural gas reserve underneath the soil), roughly 94% of the price they are requesting can be ascribed to the physical land on which the house sits. For that kind of capital, I’d much rather own something like 8.2 acres of ocean-view property in Malibu, California that I could someday turn into something or, if remaining in Houston, buy a downtown condo that essential serves as a 1,500+ square foot home-in-the-sky.

Do you have a link to that house?
I live in Houston and you must be looking WAY out in the burbs to find that for $300k. To have that house with a commute under an 30-60 minutes hour would cost triple that minimum.

Sure, no problem. I linked to it in this thread in my response to “Austin from TX” which you should be able to click on and go right to the listing.

I looked at the highest income zip codes in Houston, where the top of the city’s wealthiest and best educated households choose to reside, and they are overwhelmingly 20-40 miles from the center of downtown (the top three are 77094, 77059, and 77345). I took a rough middle figure, drew a circle around the city, and looked at neighborhoods that would be affordable to a relatively young, married, college educated couple with that radius. This particular listing is 21.5 miles from downtown, which Google estimates would take 28 minutes in normal traffic or 43% longer (40 minutes) in rush hour traffic.

The smaller percentage of the rich living downtown live mostly in high rise condominiums and multi-family buildings, with the richest zip code right in the heart of the city being 77005. There you see a significant spike in per square footage costs relative to what you can buy in the 20-40 mile radius, which is why you see fewer rich people buying there as they get less for their money (makes sense – I’d certainly be drawn to the better value).

We’re down in Texas occasionally – most recently, to look at a factory we were thinking about buying. The only place I’ve seen in the Houston metro area that made me say, “I could live here. I could feel at home here”, would be if I bought a house in Carlton Woods in The Woodlands and setup an office in one of those nearby developments so I could avoid the downtown loop altogether. I liked the rowing lakes, running trails, and golf courses.

Adam

I tried posting and it didn’t work the first time. You must have answered between my attempts. Sorry for asking twice.

Zip codes in Houston is probably not the most accurate way to view things, because the city is not very income segregated in large swaths. It’s mainly neighborhood by neighborhood and there will be extemely high income houses 50 feet from very low income housing. The Heights, Montrose, West U, Tanglewood, Bellaire, and River Oaks are all extremely high income within their boundaries. I think you would probably appreciate any of those neighborhoods. They wouldn’t offer rowing lakes, but have about everything else plus close proximity to all the cultural amenities (restaurants, music, plays, etc).

I think you have an advantage since you don’t have a daily commute. Houston traffic is more soul crushing than anywhere I’ve been outside of LA. Most of my high income friends do eventually move to the suburbs but it’s almost always for the schools (not space) and they all miss not having the drive. Most people op for apartments or expensive town homes until then.

I’ll have to look up those neighborhoods; thanks for letting me know about them!

Rob

As someone who grew up in Boston (and currently lives in Dallas) what you can get in Texas vs what you can get in Boston for 300k is…hysterical. Sad, but hysterical.

Connelly Barnes

Interesting article.

Actually lack of situational knowledge / empathy was one reason I decided to go to my current job in academia. I realized a lot of people in business do well at business because they care about their customers. My outlook is more that I care about the natural laws of the world, science, and knowledge. I wish people happiness in the abstract. But I don’t care about increasing peoples’ happiness in a concrete way by delivering goods or services to them.

The times I do care about solving a problem are usually when it’s quite technical. I enjoy creating new technology and investing in illiquid situations. Maybe someday I’ll create a tech business if I find a challenging problem where I also emotionally care about solving peoples’ problems.

Arguably the only way one can add economic value is to make people happier. But a lot of people in corporations focus instead on mimicking competitors, politics, team spirit, following fixed processes, maximizing their salary by internal positioning, etc. I wouldn’t be surprised if most people haven’t come to the realization that it’s all about increasing customer happiness (in an economically defensible niche). Contrarily many business greats have been ridiculously obsessed with customer happiness (Steve Jobs, Jeff Bezos).

Other commentators had some questions / thoughts about academia. Here is my take. You definitely shouldn’t take out high student loans unless you you have a straight path to capitalizing immediately on the value of your degree (e.g. get a Harvard economics degree to go to investment banking, but don’t get a Harvard philosophy degree for $200k). For undergraduate I turned down a pricey top school in my field to go to a cheaper one that had good teaching and I’m happy with that decision.

Also much of the rising costs in academia is due to administration — hiring more and more sub-Deans with whole teams of support staff. As far as I can tell those people mostly just increase bureaucracy. In the free market you can load companies up with useless MBAs but if you do that too much they eventually fail (e.g. HP). Academia is weirdly resilient to this market discipline because it’s a Veblen good used for economic signaling to future employers. And obviously its revenue streams are partly secured by various government branches. So as a customer of the business of academia, the business is actually serving several different masters. Many of the proposed reforms like for-profit schools (University of Phoenix) have actually screwed up this balance by say maximizing cash extracted from current students while ignoring the parts about being a Veblen good, external funding cash flows, brand value, research output, etc.

Gary Davidson

I always wondered why the “reheat beverage” key on my Whirlpool microwave was preset at 1:25. The carousel rotates once every 10 seconds. This means when I reheat a cup of coffee, upon completion the handle is 180 degrees out of phase from where I put it in: the handle is behind the cup. 1:20 or 1:30 would put the handle right where it needs to be to easily remove the cup.

Since 2001, Joshua Kennon has been the Investing for Beginners Expert at About.com. In the going-on two decades since he first published for the network, he has built up a body of work of more than 1,000 articles, essays, and lessons that are available to read for free, covering everything from how to analyze a balance sheet to strategies for portfolio risk reduction. More formally structured than the content on this personal blog, they are a fantastic introduction to the basics of wealth building and asset management for new and experienced investors alike.

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